{"id":2524,"date":"2026-02-12T20:46:49","date_gmt":"2026-02-12T20:46:49","guid":{"rendered":"https:\/\/www.xome.com\/blog\/?p=2524"},"modified":"2026-02-12T20:46:52","modified_gmt":"2026-02-12T20:46:52","slug":"what-is-a-distressed-property","status":"publish","type":"post","link":"https:\/\/cloud-prod.xome.com\/blog\/what-is-a-distressed-property\/","title":{"rendered":"What is a Distressed Property?"},"content":{"rendered":"\t\t
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What Is a Distressed Property? Types, Risks & How to Find Deals<\/h1>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Getting a bargain on a home is always exciting, especially in today\u2019s economy of rising home prices and loan interest rates that don\u2019t seem to budge much. If you go for a home that has a less-than-ideal condition, such as a distressed property, you might be able to snag a deal. But you\u2019ll need to be willing to put in the work and some tender loving care into it.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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What is a Distressed Property?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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A distressed property is a home under financial strain due to missed mortgage payments or taxes, foreclosure status, or other forms of owner hardships.\u00a0 \u00a0These don\u2019t have to be houses that are used as someone\u2019s primary residence. They could be properties owned by landlords that are struggling with difficult tenants and paying back their lender.<\/p>

When the owner is unable to pay back the lender, that lender needs to get back their money as quickly as possible. Since they can\u2019t get it from the current owner, the only way to do that is to sell it and sell it fast, usually through real estate auctions<\/span><\/a><\/span>. The good thing about this is that they tend to be listed below market value, especially if they need significant repairs, and are great for investors or anyone looking for lower-priced homes.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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What Are the Different Types of Distressed Properties?<\/span><\/h2><\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Before you jump into looking for and buying distressed houses, first learn about the different types that exist. Some may be abandoned properties (a subset of abandoned properties are called \u201cZombie Foreclosures\u201d!) that are unoccupied, homes going through foreclosure, REO-occupied properties, REO-vacant properties, properties that require repairs\/rehab, or other types of distressed property. Xome currently lists foreclosures, REOs, and short sales, among a few others. Each type has different risks involved, financing options, and timelines to consider.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Foreclosures<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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A foreclosure<\/a> occurs when a homeowner defaults on their mortgage and the lender repossesses the property. This type of distressed property can typically be bought at auction, but you\u2019ll have to be fast to keep up with the pace the lender needs to recoup their losses and have cash on hand. Most foreclosures are cash-only but come with less competition when compared to new homes that are in better condition.<\/p>

There has been a total of 36,766 U.S. properties with foreclosure filings in 2025, up 19% from 2024, according to ATTOM<\/a>, a leading provider of nationwide property data.<\/p>

Another type of foreclosure is a preforeclosure. This is when the lender has already sent a notice of default that offers the homeowners a last chance to resolve their debt. This happens before the property makes it to a foreclosure auction.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Second Chance Foreclosures or Claim Without Conveyance of Title (CWCOT)<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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A second chance foreclosure, also referred to as the Claims Without Conveyance of Title (CWCOT) program, occurs when an FHA-insured property doesn\u2019t sell at its initial foreclosure auction. HUD then allows the property to be auctioned online, giving them a \u201csecond chance\u201d.<\/p>

These distressed properties are sold as-is and as cash-only transactions. Because of this, the properties are often sold at a lower price than their appraised value, but this also requires buyers to pay the full amount upfront without any financing.<\/p>

This means the buyer is also responsible for all closing costs, title insurance, and any costs that may come with past violations, eviction, and back property taxes. However, buyers don\u2019t have to pay a buyer\u2019s premium, a fee that\u2019s usually charged in other auctions.<\/p>

CWCOT properties can be occupied or vacant, in various stages of disrepair or move-in ready, but they also tend to be some of the best deals in distressed real estate investing. Since they often require effort by the buyer to research, bid, win, close, evict, rehab and flip or rent, the \u201cSweat Equity\u201d created in these investment opportunities can be significant!<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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REOs (Real Estate Owned Properties)<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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If a foreclosure fails to sell at the foreclosure sale auction, the property becomes bank-owned and is referred to as a real estate owned property<\/a> (REO). The foreclosure sale can also be called a Trustee Sale, Sheriff Sale, Referee Sale, a Private Selling Officer (PSO) Sale, or a Courthouse steps sale depending on the state or county where the sale is held live in person. Unlike homes at foreclosure sales, REOs are owned by the bank or the ultimate beneficiary, and they may have more financing options available and are easier to purchase.<\/p>

Lenders may take care of any liens on the distressed property and may provide marketable title insurance. They may also allow for inspections, which gives you more information to make sure you\u2019re making a sound investment.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Short Sales<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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When a property is distressed and someone wants to avoid foreclosure, they can initiate something called a short sale<\/a>. This is a homeowner-initiated sale approved by the lender when the home is worth less than the mortgage owed, which is also called an underwater mortgage.<\/p>

Even though short sales tend to have slower approval timelines because the lender must fully vet the seller\u2019s hardship and usually requires extensive paperwork, they help the homeowner avoid destroying their credit by averting the foreclosure sale and creates a good opportunity for home buyers.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Can you Finance a Distressed Home?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Yes, you can finance a distressed home, but it depends on the specific property. If the distressed home is being sold at a foreclosure auction, all-cash payments are usually the requirement in many states. Lenders aren\u2019t likely to approve a traditional mortgage if the seller won\u2019t let you do an inspection or appraisal, which many foreclosures don\u2019t allow. If the seller decides to accept traditional financing, the lender might require some repairs before approving the loan or may ask for a higher down payment.<\/p>

Another option you have when trying to purchase a distressed property as your primary residence is looking into renovation loans that let you borrow for the home purchase and repair costs under one loan. The three types to look for are VA, Fannie Mae HomeStyle, and FHA 203(k) renovation loans. The amount of money you\u2019ll have to put down on the property ranges from 0% to 5% between the three, depending on your credit score.\u00a0<\/p>

If the distressed property is in good condition and in a USDA-designated rural area, a USDA loan may also be an option.<\/p>

Home buyers can also use certain types of Non-Qualified Mortgages (Non-QM loans) for buyers without W-2 income that are business-owners, independent contractors or have valuable assets. These homebuyers can apply for a Non-QM loan by showing bank statements, 1099s, or asset statements. Another type of Non-QM loan is called a Debt Service Coverage Ration (DSCR) loan, but this is only for investors who can qualify based on the estimated cash flow the property will generate as a rental to cover the terms of the loan. In general, Non-QM loans tend to have a higher interest rate than a conventional mortgage.<\/p>

Another investor only short-term financing option is a Hard Money Loan from a Private Lender (sometimes called a Bridge Loan). These loans are typically interest-only high-interest loans to help an investor acquire a property and conduct renovations and\/or flip or refinance the loan to rent the property. The terms of these loans can be as short as a few months to a few years.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Pros and Cons of Buying a Distressed Property<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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As with any home purchase, it\u2019s a big decision that comes with many pros and cons. Don\u2019t forget to weigh each carefully before moving forward with a distressed property.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Advantages of Buying Distressed Properties<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Distressed properties have many advantages, including:<\/p>